The Land Cycle is Bubbling

Farmland values are top of mind whether it is producers, investors or retirees. Recent results from the USDA find some interesting perspectives on changes in farmland values from 2011 to 2012. The farmland value cauldron is bubbling up in the Midwest and the upper Midwest. For example, in Nebraska, land values increased 35%, followed by Minnesota, South Dakota, Kansas and Iowa, which all saw well above a 20% annual increase. In the eastern Corn Belt, land values increased in the teens. Further from the epicenter, farmland value increases for the most part were in single digits, while some of the states in the Southeast saw values decline. Overall, farmland values increased 14.5% on average nationwide.

Are these increases in farmland values sustainable in the long run, or is agriculture in the crosshairs of a bubble like the 1970s and 1980s? A true bubble is a long lasting divergence of asset prices from the level that would be determined from rational expectations based on the cash returns from the asset. The great super cycle in commodities has lasted nine years, which is four times longer than the three previous super cycles in the past century. Economics have justified land value increases, particularly early in the cycle.

The super cycle and land value increases have been demand-driven by growth in biofuels, food demand and the need for natural resources such as oil, gas and minerals. Recently, the supply side has been impacted by weather shocks here in North America and abroad. Combined with low interest rates and low returns on alternative investments such as stocks, bonds, money markets and CDs, demand for farmland ownership and renting has been hotter than this past summer’s weather!

Land values are bubbling up because of investor psychology. Often, investors can be prone to feedback loops – i.e. high prices encourage higher prices – which result in a shortage illusion. In other words, people think, “They are not making any more land, so if I do not buy now, it may be 20 years until I will get the next chance.” This results in irrational behavior or “froth,” a term used by Alan Greenspan, former chair of the Federal Reserve, to describe both stock and housing real estate markets.

Bubbles occur when a very high percentage of the population buys into some original sound premise, and that premise becomes distorted as time passes. People forget the original sound premise and only focus on price action. In other words, everyone starts “drinking the Kool-Aid.” USDA results suggest that in the epicenter of farmland value increases, conditions may be bubbling!

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected]